The coming battle over natural gas

Canada and U.S. natural gas battle nears as production plans advance

From co-dependent natural gas consumers and developers, Canada and the United States may soon be competing with each other as both countries start advancing their production plans for liquefied natural gas (LNG).

“I think there is a sense of competition at the moment between the U.S. and Canada for the [Asian] market,” said Noel Tomnay, head of global gas at Wood Mackenzie, an energy research and consulting firm.

Rising natural gas production on both sides of the border, coupled with benchmark Henry Hub prices tracking 31-year lows, are forcing North American producers to find growing markets willing to pay more.

“Currently, the U.S. is clearly advantaged because it has the existing infrastructure,” Mr. Tomnay said. “It has relatively low costs for redeveloping the regasification facilities that can be redeveloped for liquefaction, whereas Canada has a blank sheet of paper.”

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U.S. LNG exports into the Pacific region could feature payback periods of less than five years, so projects able to move quickly enjoy significant first-mover advantages, says Wood Mackenzie in a recent report, adding that the U.S. could export five billion cubic feet per day by 2022.

At least three LNG projects are in various stages of development to ship Canadian gas to Asian markets, but the shale gas boom may have given the Americans a head start — at least for now.

In the past four months, BG Group PLC, Gas Natural Fenosa, Korea Gas Corp. (KOGAS) and Gail Gas Ltd. (GAIL) have signed deals for a combined 2.1 bcfd of LNG from Cheniere’s proposed liquefaction facility at the Sabine Pass regasification terminal, located on the U.S. Gulf Coast. The project hopes to start two LNG trains by 2016, with two more by 2018. While most of the deals are for European markets, the GAIL deal is for India, giving Cheniere a foothold in the prized Asian market. The Houston-based LNG developer said in December it plans to build a second export plant at Corpus Christi in Texas.

In Canada, Apache Corp. is leading one of the groups planning a terminal in Kitimat, B.C., with first shipment set for 2015 with an initial capacity of 700 million cubic feet per day.

Shamsul Azhar Abbas, chief executive of Malaysia’s Petronas, which has an 80% in a second LNG joint venture under consideration, told Bloomberg this week that by August it should be able to “complete the feasibility study for another liquefied natural gas plant on the west coast of Canada.”

Meanwhile, Royal Dutch Shell PLC, PetroChina Ltd. and partners from Japan and Korea are planning another terminal. Shell says a decision on the project is two years away.

“The U.S. is a net energy importer and there is a movement to advocate for export restrictions on LNG,” Mr. Leach said. “It is one of the factors that may restore U.S. economic pre-eminence in manufacturing and the petrochemicals industry is starting to specifically advocate against the wisdom of even considering LNG exports. I think Canada has an advantage as I don’t think we will have that kind of debate here. The manufacturing bases of Ontario and Quebec don’t depend on Alberta and B.C. gas as much.”

Gas development is a cornerstone of British Columbia’s development and those resources will likely not be developed if they don’t fetch higher prices that can only be obtained by exporting, Mr. Leach said.

The Canadian gas export strategy is crucial to the industry. U.S. Energy Information Administration estimates show Canadian gas exports to the U.S. were significantly below the previous five-year range, and have been lower for much of 2012 so far. Meanwhile, U.S. natural gas production is growing, primarily from shale gas formations that are being shipped on pipelines into Canada, with increased deliveries to storage facilities in Ontario.

The double-whamy of falling exports to the U.S. and rising intake of American shale gas to Eastern Canada is hurting Canadian gas producers.

That compulsion, Mr. Leach said, makes Canadian LNG exports to Asia far more likely than any American resolve to ship out shale gas derivates to the wider world.

But regardless of the U.S. decision on LNG exports, gas prices will go up as export avenues open up.

“If Canada starts exporting gas elsewhere, guess what will happen to North American gas prices? They will still go up, as Canada is connected to the U.S.,” Mr. Tomnay said. “So ironically, the U.S. politicians may argue about ths issue but if they don’t take advantage, Canada will, and gas prices will still go up. For the U.S., it’s a case of use it or lose it.”